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Lease Options to the Rescue

By Reno Charlton | January 10, 2011

In the current climate buying a home has become far more difficult for most people due to lack of mortgage finance, difficulties in raising a down payment, and poor credit scores. For those that aspire to buying their own home this is a devastating combination that could put this dream out of reach for their foreseeable future. Fortunately, there are solutions for buying that first home, even in this investment climate.

As a consequence of these same conditions where buyers may be "locked out" of purchasing, there also exists a situation where homeowners that want to sell their property cannot. In many cases price reductions have driven sellers out of the market with choice properties even, because low selling price and other cost factors in the deal make it unfeasible. And here is where putting two lose situations together can equal a big win.

A lease option is something that could effectively eliminate these issues for both parties. It is basically an agreement to lease a home and purchase it within a specified time period. The buyer/leaser agrees to a monthly payment that is higher than the normal rent to cover the down payment and also pays a deposit at the time of leasing. A lease option agreement actually has a great number of advantages for both sides of this seller-buyer equation - particularly in this market. Ideally, the big win-win should be easy to accomplish given the parties are sincere and the agreement is firm.

Fotolia hanshake

Image credit - © Thomas von Stetten - Fotolia.com

Whilst lease option seems to be a good idea in principle, there are pros and cons that need to be considered by both the landlord/seller and the leaser/buyer, and some of these are as follows:

Pros and cons for sellers

  1. You can save a fortune in fees, charges, and commissions usually associated with selling your home
  2. You can get the full value sometimes for your property
  3. You will get a good tenant, as the person will be moving in with the intention of eventually buying the property
  4. There is a chance that at the end of the lease the tenant does not or cannot complete the purchase
  5. You could miss out on appreciation in the property between the time you agree to the lease option and the time that  the property purchase goes through

Pros and cons for buyers:

  1. You can get into the property without the worry of having a large down payment, perfect credit, or a mortgage loan
  2. You get to try the property before you buy so you can be sure that you are in the right property and area
  3. You can save for your down payment and improve your credit whilst leasing the property ready for when it is time to make the purchase
  4. There is a risk of losing the deposit that you pay if the seller cancels the agreement because of something as simple as a late payment
  5. You would lose your deposit along with any payments made on monthly lease payments if you decide not to go ahead at the end of the lease period or are unable to go ahead due to continued difficulties with getting a mortgage
Contract signing via Fotolia

Photo credit - © pressmaster - Fotolia.com

As you can readily see, even in a depressed housing market buyers and sellers can often come to terms via "out of the box" thinking and cooperation. A lease option, with proper safeguards for both parties in place, is one excellent way to put buyers and sellers together. Expect to see more of these types of arrangements as prices continue to decline. Next we need to see what the broker's role can be in these types of agreements.

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